Learn how to survive on Medicaid rates for PPACA

To flourish under health reform, hospitals will "need to learn to operate on Medicaid rates." That piece of advice for dealing with the Patient Protection and Affordable Care Act (PPACA) comes from a new analysis, "Health Reform: Prospering in a Post-Reform World," by the consulting firm PricewaterhouseCoopers (PwC) in New York. While the recommendation might sound like a tall order for many hospitals, there's no need for a "knee-jerk reaction," Brad Bowman, a director in PwC's Healthcare Advisory Practice, tells me.

Most of the PPACA mandates begin coming into play in 2014, so hospitals have "a three-to-five-year window." However, "don't wait for 2013 to get ready," he advises. "Forward-thinking CFOs are taking this time as an opportunity to prepare." Bowman shared three steps that hospital CFOs should take to enable their hospitals to learn to live on a governmental payment scheme:

Step 1: Control costs.

Hospitals have to understand what drives their costs, says Bowman. He advises CFOs to do the following:

• Ensure that length of stay for inpatient admissions is consistent with industry benchmarks.
• Understand the utilization of supplies and drugs "since they contribute dramatically to the overall cost of care."
• Double-check that ordered tests "are done for the appropriate medical reason and not for the purposes of defensive medicine."
• Look at labor. "Hospitals should make sure that they are benchmarking themselves against their peers and that they are using the appropriate amount of labor and the appropriate mix of labor in order to control costs," says Bowman. Many hospitals waste time explaining why their labor needs to be different from national benchmarks when they should be evaluating the practices of hospitals in the top quartile to learn how they can transform themselves "to the extent clinically and operationally appropriate," he points out.

Step 2: Make sure you have a strong revenue cycle.

Hospital CFOs should conduct a "front-to-back" review of each component in the revenue cycle: documentation in the medical record, coding, billing and collections, advises Bowman. "The best practice would be to have an outside, independent third party review your revenue cycle every couple of years." The third-party review should ensure that the hospital is capturing all of the opportunities to bill and collect revenue, but it also should search for compliance opportunities, he suggests. "You want to balance looking for the opportunity and making sure you are billing compliantly within the regulations and the law."

Step 3: Insert yourself in the quality discussion.

CFOs often "sit in the background with regard to the quality discussion because the quality happens on the operations side," notes Bowman. "But there are a lot of skill sets within the finance and accounting realm of the system that could dramatically assist the ability of an organization to improve quality. First, there is a lot of bench strength with regard to analytical skills within the finance and accounting department. So this department is perfectly suited to do the tracking and trending on the quality initiatives."

The finance team "also can help in calculating costs" related to poor quality performance, says Bowman. "When we look at quality, tying the dollars into it sometimes can help build organizational momentum." For example, the finance department can share the costs and impacts of readmissions, hospital-acquired conditions and, potentially, the dollar impact on value-based purchasing. In that same vein, the finance department can examine the cost of medical errors and ensure that the operational team has "a full understanding of the costs," says Bowman. Those costs include both direct costs (e.g., malpractice costs of settling a claim) and indirect costs, which include costs incurred by the practice of defensive medicine and reduced payments.

Hospital CFOs should at a minimum support quality initiatives, but proactive CFOs might want to sponsor a few special projects as well, he recommends. "Think of quality as an opportunity to have a return on investment, and as such, this is the perfect role for the CFO to jump in and say, ‘This is a way we can improve our organization's financial footing by improving the quality.'"

Good starter projects include examining readmission rates for patients with acute myocardial infarctions or pneumonia, he suggests. "Use this as an environment where you can brainstorm cooperatively within the organization. It is not uncommon for large healthcare organizations to be very siloed. This is a great opportunity for the CFO to cross all of those lines. Since he sits at the top of the organization, he can say, ‘We're going to use IT to pull data out of our system, we are going to use finance to do the analytics of that data, and we are going to use operations staff from the perspective of getting their clinical judgment as to where things went wrong and how they can be corrected on a go-forward basis." - Caralyn